What Is a Qualified Retirement Plan?

A qualified retirement plan is an employer-sponsored retirement plan that meets the requirements of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA), making it eligible for certain tax benefits. These can include tax deductions for employer and employee contributions and tax deferral of investment gains.

Understanding Qualified Retirement Plans

Qualified retirement plans come in two main types: defined benefit and defined contribution, though there are also some other plans that are hybrids of the two, the most common of which is called a cash balance plan.

Defined-benefit plans give employees a guaranteed payout after retirement and place the risk on the employer to save and invest properly to meet plan liabilities. A traditional, annuity-type pension is an example of a defined-benefit plan.

With defined-contribution plans, the amount of money that employees will have available to them in retirement depends on how much they contribute and how successfully they invest those contributions. The employee typically chooses what to invest in and bears all of the investment risk. A 401(k) is the most popular example of a defined-contribution plan.

Other examples of qualified plans include:

• Profit-sharing plans
• 403(b) plans
• 457 plans
• Money purchase plans
• Employee stock ownership plans (ESOPs)
• Salary Reduction Simplified Employee Pension (SARSEP) plans
• Simplified Employee Pension (SEP) plans
• Savings Incentive Match Plan for Employees (SIMPLE) plans

Requirements for Qualified Retirement Plans

The tax code lays out a long list of requirements that plans must meet to be qualified.

For example, employees must be eligible to participate in the plan no later than the date when they turn 21 years old or the date when they complete one year of service, whichever comes later.

Once they are eligible to participate, employees must be allowed to join the plan no later than the first day of the first plan year beginning after the date when they met the minimum age and service requirements or six months after the date when they satisfied those requirements, whichever comes earlier.

The tax code also establishes the rules for vesting, employer matching contributions, rollovers, distributions, and more.

Employers have some leeway within these rules, but once they have put the specifics of their plan in writing—as they are required to do—they must adhere to them unless they amend the plan.

Qualified retirement plans are also subject to the rules of the Employee Retirement Income Security Act of 1974 (ERISA), which is administered by the U.S. Department of Labor. One of its chief requirements is that plan sponsors (employers) and administrators act as fiduciaries, meaning that they must make investment decisions in the best interest of plan participants. If they fail to do that, they can be held personally liable to make up any losses.

Tax Benefits of Qualified Retirement Plans

Employers that provide qualified retirement plans for their employees can take a tax deduction for the money they contribute to the plans, up to certain limits. Those limits depend on the type of plan, with defined-benefit plans having higher contribution limits than defined-contribution plans.

With defined-contribution plans, employees can take a tax deduction for their contributions, reducing their taxable income and therefore their taxes for the year. They’ll pay tax on that income only when they later withdraw it, usually in retirement. In the meantime, the investment earnings on the money in their account will be tax-deferred, again until it’s withdrawn. (Roth-type accounts are an exception here—they don’t provide any tax deduction going in, but later withdrawals will be tax-free as long as the account owner meets the rules.)

Depending on the specific provisions of the employer’s plan, qualified plans can also allow employees to take out loans and make penalty-free early withdrawals under certain circumstances.

The Bottom Line

Qualified retirement plans are employer-sponsored plans that meet the requirements of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA) and are eligible for certain tax benefits, such as tax deductions for contributions and tax deferral of investment gains. Qualified retirement plans can be either defined-benefit or defined-contribution plans.